The ubiquity of Milton Friedman assertion during the late 70s and most...

The ubiquity of Milton Friedman assertion during the late 70s and most of the 80s goes some way in explaining not only why the ECB has been so reticent to embark on quantitative easing, but also why it is the right course of action.

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During the 70s, many developed nations in the West suffered from stagflation, a combination of moribund growth and high inflation. Monetarists, led by Milton Friedman, blamed this on the excess money supply generated by central banks. This, they argued, led to too much money chasing too few goods, forcing up prices and leading to a price/wage spiral and resultant high unemployment. With this, out went the previously dominant Keynesian theory of demand management and the focus switched to supply-side management; control of the money supply was now of paramount importance.

The newfound focus on monetary purity played a large role in the Japanese financial crisis of 1992. This initially started with an speculative bubble in Japan, which saw asset prices greatly inflated. However, fresh with the memory of Western nations suffering from stagflation, the Japanese Central Bank acted to avoid the same fate. However, many believe that it was this excessive tightening of monetary conditions that was responsible for what has become know as the Lost Decade. This saw a period of anemic economic growth and deflation; in reality, this still continues to this day, although with the recent onset of Abenomics there is hope that the economy will now improve.

Undoubtedly, the reaction of the UK and US Governments to the 2008 Financial Crises was heavily influenced by the Japanese experience. Fearing a similar lost decade, monetary rectitude went out the window and in came measures not seen since the Keynesian era, namely loose monetary policy and Quantitative Easing. Not only was this successful in helping to prevent a subsequent recession, but it also highlighted the fallacy of Friedmans statement that leads the article. Despite both the UK and the US pumping billions a month into their respective money supplies, inflation has remained remarkably low in both economies.

Based on the evidence in the States and UK, it is hard not to believe that Eurozone did not embark on the same course of action earlier. However, as was mentioned at the beginning of this piece, Friedman provides the answer. Decision-making at the ECB is de facto dominated by the Eurozones largest economy Germany and they, more than most, know the dangers of printing money and so are puritanically monetarist. Thus, they have a natural disposition to agree with the aforementioned statement. However, the reality of deflation has proved too pressing and, based on results in Japan, UK and the States, they have finally acquiesced to a 1.1 billion stimulus package.

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Posted in Health and Medical Post Date 12/01/2022